Protectingconsumers

Creating confidence in the building industry

FAQs

1. How does the scheme work?

The Fidelity Fund was set up as one part of a major package of reforms for the residential building sector introduced by the Northern Territory Government at the beginning of 2013 to protect consumers.

Under the scheme, builders apply for an annual level of cover. Their portfolio is then monitored and builders may be asked at any time to produce their financials.

Builders, on behalf of their clients, also have to obtain a certificate of cover for every new house, units up to three storeys or extension. This cost is passed to the consumer, who is issued with a Fidelity Fund Certificate through their builder.

The scheme covers private residential work and work for the Defence Housing Association, not commercial or transportable buildings or NT Government contracts (which come under the Contractor Accreditation Limited or CAL).

The scheme also covers owner builders to ensure that if they sell their house, the next owner is covered for defects.

The Residential Building Cover is accessible only when a trigger event has occurred. In other words, the builder has died, disappeared, become insolvent or had their registration suspended or cancelled.

This means that in all instances where there is an allegation of defective or incomplete work by an owner and a trigger event has not occurred, the owner must apply to the Commissioner of Residential Building Disputes, not the insurer or fidelity fund provider. The Commissioner has the power to determine whether the building work is in fact defective or incomplete. If so, it can order that the builder rectify or complete the work.

The Fidelity Fund replaces the Home Builders Certification Fund which covered only non-compliance with the National Construction Code and provided no protection against builders’ failure to complete homes.

(See also detailed information for builders on the Northern Territory Government’s Building Advisory Services site at www.lands.nt.gov.au/building/residential-building-insurance)

2. What are the benefits of the scheme?

The scheme is not designed to cover everything but it does provide certainty for consumers that their projects will be finished and it provides for a more secure residential building sector. In the past four years, at least eight builders have gone bust, leaving 60 consumers (or families) in limbo with homes in various stages of completion. Had the Fidelity Fund been in place, they would have benefitted from up to $200,00 each towards completing their homes.

Residential Building Cover indemnifies current owners for two things. The first element of the cover is that it will pay out on claims arising from non-completion of the building work, for example, where a trigger event occurs during construction. In that situation, there will almost certainly be costs for the owner to engage a new builder and the cover indemnifies the owner for those reasonable additional costs of engaging the new builder (within the cap of up to 20% of the contract price up to a maximum of $200,000).

The second element of the cover is that it will pay out on claims for defective work also only where a trigger event has occurred. For example, if defects become apparent during the period of the consumer guarantees, and a trigger event has occurred, the current owner may make a claim to the Residential Building Cover provider (currently the Master Builders’ Fidelity Fund is the only provider in the Northern Territory). The cap for this element of the cover is $200,000, less any amount that has already been paid for a non-completion event. This means that the total amount that could be claimed on is $200,000.

The benefits of reforms, which includes the Fidelity Fund, are:

it helps the industry through checks on high risk builders who give the industry a bad name

it protects consumers from the minority of builders who deliberately, through poor management or bad luck are unable to complete the work

the Fund supports ongoing industry development

it helps the consumer by ensuring builders have the financial capacity and experience to meet their commitments – the Fidelity Fund works with builders to ensure they don’t over commit and get into financial strife

changes to the Building Act mean that there are now defined progress payments so the builder can claim only for work that has been completed

the home owner now has a 12-month non-structural guarantee (taps, cupboards, doors) on the home and a six-year structural guarantee (roof and wall structures, concrete slabs)

there is also a dispute mechanism which is administered by Consumer Affairs if there is a dispute between the owner and builder

it allows consumers to claim up to 20% of the contract price capped at $200,000 if their builder dies, goes bankrupt, disappears or leaves a legacy of poor work

deposits are limited to 5% of the contract cost

the Fidelity Fund is running an education campaign to make consumers more aware of what the Fund covers and tips on things to be aware of when building a new house

most importantly, it provides a number of mechanisms to prevent problems or pick them up early, saving cost and heartache for people who have often invested their life savings in a new home.

The best result for the Fidelity Fund and consumer confidence would be that no builders go bust and no consumers are left in the lurch.

3. What if 20% of the contract cost isn’t enough?

If consumers don’t make progress payments until work is completed, this would normally be sufficient to cover any losses. What is important is that consumers get competitive quotes so they are not over-charged and that they don’t make progress payments until work is satisfactorily completed.

4. I’m a builder and I’m worried I’ll be held responsible for what my tradesmen do

It is true that builders are being held responsible for work by tradesmen. However, if things are properly installed and fit for purpose, this shouldn’t be an issue. If things break down, they are likely to be covered by manufacturers’ warranties or home insurance.

5. Why is this a scheme of ‘last resort’ (ie you can’t claim until builders go broke, die or disappear) rather than ‘first resort’ (ie when consumers become concerned about a job)?

A report on the WA scheme found that while schemes of ‘first resort’ offer more protection, they are also more expensive and more prone to nuisance claims. We would see a ‘last resort’ scheme as a safety net, combined with proactive measures to protect consumers and a mediation role by Consumer Affairs. For a summary of how interstate schemes have operated, see the Economic Regulation Authority Western Australia’s “Analysis of home indemnity insurance scheme designs” published in March 2013 (www.erawa.com.au)

The most important thing is a good relationship between builders and consumers so they can work together to solve any issues.

6. What happens when a builder declares bankruptcy?

At that point, the builder has broken their contract with the owner and the owner would make contact with the Master Builders Fidelity Fund. Each circumstance is different but owners can access the rights covered in their certificate.

7. Does that mean tradespeople are covered?

No, the owner is the beneficiary of the certificate.

8. How many houses are covered so far?

Since the scheme began in January 2013, the Fidelity Fund has issued 400 certificates of cover for property worth $164 million and conducted 247 financial and capacity assessments of residential builders.

9. How many builders have been refused registration?

None. The only limitation on any builder has been the amount of work they have been certified to take on. In fact, some of the people who are complaining to the media have never applied for registration. Our records show that 95% of builders have been covered for the level applied for.

10. Where does the money go?

The money collected goes into a trust account to build up capital to ensure claims can be paid out. The fund also has to meet operating and fixed costs, such as administration, the cost of actuaries and auditors and the financial checks and registration process and ongoing industry oversight.

11. It seems like a bit of a ‘cash cow’, how much profit does Master Builders make?

None, it’s a not for profit scheme. The scheme is run by trustees and all money goes either on costs or into the trust fund. The Master Builders Association provides administration and secretarial services and has sub-contracted to an actuary, compliance auditor and financial auditor, who are required under the Building Act.

12. What about the Government’s review?

We will cooperate fully with the review and make a submission. However, it is too early to say the model doesn’t work. In fact, we believe it is working extremely well. A very similar scheme has been operating in the ACT for more than a decade and Territory arrangements have benefitted from the ACT’s experience.

13. People don’t seem to know much about it

We agree. There is a fair bit of misinformation about the scheme. However, we are now implementing a communication strategy. Early research suggests low awareness by consumers not just of the Fidelity Fund but many issues relating to buying and building houses and units. So we are encouraging the industry to work with both the Master Builders Association of the Northern Territory and the Housing Industry Association to hold information nights and help consumers with tips on everything they need to know.

14. What was wrong with the previous scheme run by TIO?

The Home Builders Certification Fund was a Government fund administered by TIO which covered only compliance or structural failures. It did not protect consumers if a builder went broke, died, or disappeared without completing a home. In other words, it wasn’t an effective protection for consumers.

15. Have there been any pay outs?

No, but keep in mind that the scheme has been running less than six months so most houses covered by the scheme are still under construction. We would also hope to reduce the number of pay outs by focussing on preventative measures, such as random inspections by our compliance auditor. This is a key difference between a Fidelity Fund and an insurance product.

16. Does the Fidelity Fund take out reinsurance?

It can and probably will at some stage. It is a relatively small fund and one large builder going bust would be a high risk to the fund’s viability during this period when reserves are building up.

17. Does the scheme cover fraud and criminal behaviour?

No insurance protects you against criminal behaviour, but the Fidelity Fund and the Building Act do contain several checks and balances that mitigate the risk, such as builders having to be registered, random inspections by a compliance auditor and limits on progress payments. A builder behaving fraudulently, such as using another builder’s licence or encouraging owners to become owner-builders is more likely to come to notice. Consumers also have someone to turn to if they are worried about a builder’s behaviour. However, it may not cover you for over-quoting and some fraudulent behaviour. It pays to get three quotes and seek independent advice if you are unsure.

Note that Building Regulation 41HE(2) provides that:-

A prescribed building contractor must not request or receive from the contracting owner:

(a) a payment for carrying out prescribed building work except as a progress payment after completion of the stage of work to which the progress payment relates, as specified in or under the residential building contract for the work; or

(b) more than the percentage of the total contracted price that is specified in or under the residential building contract.

Maximum penalty:

Individuals-50 penalty units. Note: As at January 2015 a penalty unit was valued at $149. This is reviewed annually.

Company-250 penalty units

Note that the Building Act 54AC(2) provides that:-

A residential builder must not demand or receive payment (whether as a deposit or otherwise) under a residential building contract unless:

(a) one of the following is in force for the prescribed residential building work to be carried out under the contract:

(i) an authorised RBI policy;

(ii) a fidelity certificate; and

(b) the builder has given the other party to the contract:

(i) the RBI policy document for the work; or

(ii) a copy of the fidelity certificate.

Maximum penalty:

Individuals-85 penalty units. Note: As at January 2015 a penalty unit was valued at $149. This is reviewed annually.

Company-425 penalty units

18. What difference would this scheme have made with a Carey Builders?

First there would have been more scrutiny as the contracting entity (Carey Builderins Pty Ltd) would have been required to apply for eligibility to take out Residential Building Cover. This is when it would have been picked up that Carey Builders Pty Ltd was not in fact registered. Second, the Building Act stipulates that progress payments can be made only for completed work. It is important that consumers know their rights and are not pressured into making advance payments.

19. At what point can I make a claim

Anyone concerned about their builder can also ring the Fidelity Fund to seek advice and the Fidelity Fund compliance auditor may be able to look into the matter.

The whole point of the scheme is to protect consumers. There are two reasons why it would be less effective if voluntary.

In WA, where the scheme was voluntary, only 44% of eligible people sought certificates. If the scheme doesn’t have enough members, it becomes unviable – or more expensive – because its loses economies of scale and still has to meet fixed costs, such as paying actuaries and auditors.

We believe it is the people who are the most vulnerable – through inexperience, lack of understanding, or through financial pressures – are most likely to use builders based on cost rather than a track record of quality work. If a scheme is compulsory, everyone is protected.

Unfortunately, schemes such as the Fidelity Fund are designed to protect the most vulnerable from the least competent. A voluntary scheme is unlikely to achieve this.

22. Can other schemes compete in the Territory?

Anyone can compete, however we believe the size of the market would make it difficult to do this viably, given the extent of fixed costs. The Master Builders Fidelity Fund is underwritten by the Northern Territory Government for the first five years to ensure it can make any payouts required before the scheme is able to build up sufficient cash reserves.

23. Is it true this type of scheme hasn’t been successful anywhere else?

No, Master Builders adopted a very successful model that’s been operated by Master Builders in the ACT for more than 10 years. This is the basis of the scheme adopted in the Northern Territory, although the Government made some modifications to the scheme.

24. Is it true that it’s twice as expensive as other schemes?

It may be more expensive, but that’s because houses in the Northern Territory are more expensive. The cover for a house that costs between $450,000 and $499,000 to build is $2900 for example. We think of this as an ‘affordable’ house while it would be thought expensive in many other parts of Australia. An interstate insurer has recently advised they no longer want to be part of that state’s scheme because they weren’t making enough money.

People calling for the scheme to be cheaper may not understand the obligatory fixed costs we have to meet under the various legislation and accounting standards.

25. Why should builders have to disclose their financials?

Providing financials for the fund is no different to providing information for some large tenders or accreditation with the Contractor Accreditation Limited (CAL). It’s to ensure companies aren’t over-extending themselves, building up unsustainable levels of debt or taking on new work when they are experiencing financial difficulties, and putting unwitting clients at risk by robbing Peter to pay Paul.

Builders need to know that all the information they provide is kept strictly confidential.

26. Why is there so much paperwork involved in this scheme?

It’s a fact of life that there is paperwork involved in all aspects of business these days. We are doing our best to keep the process streamlined and would welcome any suggestions on aspects that might be improved.

27. Is it true that the scheme is creating a barrier to new builders getting into the industry?

No, it’s just ensuring they have the experience and finances to meet their commitments to clients. As they finish one house, they can get a certificate to do another. They can apply at any time to have their level of cover increased.

28. Do builders have to provide a personal guarantee?

No builder has been asked to provide a personal guarantee at this stage. However, a sole trader may have to provide information on assets and liabilities, which could include personal assets to demonstrate they are solvent.

29. How easy would it be to cancel or transfer the scheme?

That’s a matter for Government, but it should be noted that 400 people have already paid for certificates so the scheme would need to be maintained to meet the fund’s legal obligations to these people, incurring substantial costs.

30. How did the Government select Master Builders to administer the scheme?

The Northern Territory Government called for Expressions of Interest. Master Builders and the Housing Industry Association (which runs insurance schemes elsewhere) both applied. The reasons for selection would be a matter for government.

31. There seem to be a lot of disgruntled builders

We accept that some builders prefer the old scheme. However, we have received feedback from builders who applaud the Building Residential Cover reforms and see it as providing greater confidence in the industry. We would like to hear from industry and consumers if there are any aspects of the Fidelity Fund and its operations that could be improved and we will include them in a submission to the Government’s review.

32. What happened to the money in the Home Builders Certification Fund?

It was a Government scheme.

33. How do I provide feedback on the scheme?

Contact us on Phone: 08 8922 9680 or email: info@fidelityfundnt.com.au